by Bank Reconciliation Statement (BRS) is a financial document prepared to reconcile the difference between the bank balance shown in the Cash Book (maintained by the business) and the balance shown in the Bank Pass Book (issued by the bank) on a particular date. These differences arise due to the timing gap in recording transactions or due to errors and omissions in either book.
Common causes include cheques issued but not yet presented, cheques deposited but not yet credited, bank charges or interest not recorded in the Cash Book, or errors in recording by either party. Since the two books are maintained independently, discrepancies are natural.
Purpose of Bank Reconciliation Statement:
- Match Bank and Book Balances
The primary purpose of a BRS is to match the balance shown in the Cash Book (maintained by the business) with the balance in the bank passbook (issued by the bank). These balances often differ due to timing gaps or unrecorded items. The BRS helps ensure that both records are in agreement or that any differences are properly accounted for, thus maintaining accurate financial records and enhancing transparency in banking transactions.
- Detect and Correct Errors
Another important purpose of BRS is to identify errors or omissions in either the bank records or the company’s books. For example, if a cheque is recorded twice in the Cash Book or if the bank fails to credit a deposit, these discrepancies can be spotted through reconciliation. Once identified, these errors can be corrected promptly, ensuring that the company’s accounting system remains accurate and reliable, which is essential for correct reporting and decision-making.
- Prevent Frauds and Unauthorized Transactions
The BRS helps in the prevention and detection of frauds or unauthorized transactions. If there is any suspicious withdrawal, double payment, or unexpected charge, it will appear in the bank statement but not in the Cash Book. Regular reconciliation can help businesses quickly identify such irregularities and investigate them. This improves internal control, reduces the risk of financial loss, and ensures that only authorized banking activities are reflected in the records.
- Monitor Cheque Status
BRS serves the purpose of tracking cheques issued or deposited. Sometimes, cheques issued to suppliers may not yet be presented for payment, or cheques deposited by the business might still be pending clearance. These items create timing differences between the two records. Preparing a BRS highlights such pending transactions and helps the business keep track of which cheques are still outstanding, allowing for better cash flow management and communication with banks or customers.
- Confirm Actual Bank Balance
The statement helps in determining the actual amount available in the bank account at any point. The Cash Book may show a different figure due to unrecorded bank charges or interest. BRS brings clarity by adjusting for such differences and revealing the true bank balance. This enables accurate planning of expenses, payments, and investments. Knowing the correct bank balance is critical for avoiding bounced cheques and managing liquidity effectively.
- Improve Accounting Accuracy
The BRS is vital for ensuring accuracy in the books of accounts. When discrepancies are resolved through reconciliation, the business can be confident that its financial records are free from inconsistencies and clerical mistakes. This is essential for maintaining trust among stakeholders, auditors, and tax authorities. Periodic preparation of BRS reflects a disciplined accounting approach, promoting reliability in the accounting system as a whole.
- Simplify Audit Process
During audits, BRS plays an important role by serving as a supporting document for verifying cash and bank balances. Auditors rely on the BRS to cross-check the consistency between company records and third-party (bank) confirmations. A well-prepared BRS simplifies the audit process, reduces queries, and enhances the credibility of the company’s financial statements. It also shows that the business maintains proper control over its cash and bank dealings.
- To Assist in Financial Planning
With accurate information about pending transactions, the BRS helps in financial forecasting and decision-making. By understanding the timing of receipts and payments, a business can plan its working capital, negotiate payment terms, and prepare for upcoming liabilities. It also allows management to assess bank charges, interest earned, or any unexpected debits, thus ensuring informed financial planning and better cash management practices for future operations.
Components of Bank Reconciliation Statement
- Balance as per Cash Book
This is the starting point for preparing a Bank Reconciliation Statement. It refers to the bank column of the Cash Book maintained by the business. It shows the balance the business believes it holds in its bank account. However, this balance may not match the bank’s records due to timing differences or unrecorded transactions. BRS begins with this figure to reconcile and explain any differences with the balance shown in the Bank Pass Book.
- Balance as per Pass Book
The Pass Book (or Bank Statement) is issued by the bank and reflects the transactions from the bank’s perspective. It shows deposits as credits and withdrawals as debits. Sometimes, the BRS starts with this balance instead of the Cash Book. Discrepancies between this balance and the Cash Book arise due to cheques in transit, bank charges, or interest not yet recorded. This component is crucial for identifying variances in banking records.
- Cheques Issued but Not Presented
These are cheques that the business has issued to creditors or suppliers and recorded in its Cash Book but have not yet been presented to the bank for payment. Until they are presented and cleared, the Pass Book does not reflect these payments, resulting in a higher balance in the Pass Book than the Cash Book. Adjustments for these cheques are made in the BRS to match the actual position.
- Cheques Deposited but Not Credited
These are cheques that the business has received from customers and deposited into the bank, recorded in the Cash Book, but the bank has not yet cleared or credited them. Until clearance, the Pass Book does not show the entry, creating a timing difference. The BRS accounts for such items to reconcile the two balances, ensuring that the Cash Book is not over-representing available funds.
- Direct Deposits by Customers
Sometimes customers may directly deposit money into the business’s bank account without informing the business immediately. These receipts appear in the Pass Book but are not recorded in the Cash Book yet. This causes the Pass Book balance to be higher than the Cash Book. During BRS preparation, these items are added to the Cash Book balance to reconcile the difference and update the company’s records.
- Bank Charges and Interest
Banks may deduct charges for services (like account maintenance, cheque clearing) or credit interest on deposits. These entries are made in the Pass Book but are often not recorded in the Cash Book unless notified. Such charges or credits create discrepancies, and must be adjusted during reconciliation. This component helps ensure the Cash Book reflects all expenses and income related to the bank account.
- Dishonoured Cheques
If a cheque deposited by the business bounces or is dishonoured, the bank will reverse the amount credited earlier. This is shown in the Pass Book, but unless the business updates the Cash Book, the balances will differ. Identifying such dishonoured cheques is important to reconcile both books accurately and update the company’s receivables or customer accounts accordingly.
- Errors in Books
Errors may occur in either the Cash Book or the Pass Book. Examples include wrong posting, overstated amounts, or double entries. The BRS helps detect such mistakes. Any error in addition, omission, or recording can lead to mismatched balances. Correcting these errors through BRS ensures that both records are accurate and reflect the true bank position, safeguarding the integrity of financial statements.
Preparing the Bank Reconciliation Statement:
Step 1: Choose the Starting Point
Start the BRS either with:
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Balance as per Cash Book, or
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Balance as per Pass Book
(Usually, the Cash Book balance is preferred, but either can be used as long as it’s clearly mentioned.)
Step 2: Add Items Credited by Bank but Not in Cash Book
Include items that the bank has credited (increased the balance) but are not yet recorded in the Cash Book:
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Direct deposits by customers
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Interest credited by the bank
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Refunds or bank transfers received
Add these amounts to reconcile the balance.
Step 3: Deduct Items Debited by Bank but Not in Cash Book
Subtract items that the bank has debited (reduced the balance) but are not yet recorded in the Cash Book:
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Bank charges
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Interest on overdraft
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Standing orders or auto-debits
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Dishonoured cheques
Deduct these to arrive closer to the reconciled balance.
Step 4: Adjust for Cheques Issued but Not Presented
When cheques have been issued by the business but not yet presented for payment:
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Already deducted in Cash Book
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Not yet deducted in Pass Book
Add these amounts (if starting with Cash Book) to reconcile.
Step 5: Adjust for Cheques Deposited but Not Cleared
When cheques have been deposited into the bank but not yet cleared:
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Already added in Cash Book
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Not yet added in Pass Book
Deduct these amounts (if starting with Cash Book).
Step 6: Rectify Errors
Correct any errors identified in either book, such as:
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Double entries
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Wrong posting
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Overstated or understated amounts
Add or subtract these as required for reconciliation.
Step 7: Calculate Reconciled Balance
After making all additions and deductions, compute the final balance, which should match the balance in the Pass Book (or Cash Book, depending on the starting point).
